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Asset quality outlook improving; earnings set to gain momentum

Axis Bank (AXSB) is one of the largest private sector banks in India with 4,528 branches and 12,044 ATMs spread across the country. It has a loan book of ~INR5.7t, grew at a CAGR of 15% over FY15-FY20.

Strengthening retail franchise: Economic indicators are turning better than expected, with activity reaching pre-COVID levels, especially in Housing, Cement, Metal, and Automobiles, while rural continues to show strong momentum. Infact, retail loan disbursements have surpassed pre-COVID levels, with healthy traction seen in secured products. This was well reflected in the strengthening of the AXSB’s retail business franchise, with the share of retail loans improving to ~55% of total loans – led by home loans. Further, over 80% of unsecured loans are towards salaried customers. On the liability side, share of CASA + retail term deposits stands at ~86%, ensuring relatively stable funding costs. ~1.7m new liability accounts were opened in 3Q, taking the total to ~4.8m in 9MFY21. However, on the commercial banking side, the bank would remain cautious, while aiming for strategic growth. 80% of the book is rated SME 3 or better, with 84% of incremental disbursements rated SME 3 or better

Asset quality outlook improving; high proforma PCR will aid provisioning decline over FY22/23:

AXSB has seen a sharp increase in proforma slippages, led by the retail book – which comprises ~84% of totalslippages (remain cautious on unsecured lending). However, going ahead, management expects slippages to moderate in 4Q. Further higher proforma PCR will help AXSB to reduce its provisioning over FY22- 23, thus boosting profitability. The bank witnessed decline in its BB & below book, while the overall restructuring book remains limited to 0.42% of loans(the bank does not intend to provide any fresh approvals). While the bank guided for moderation in NPL formation going ahead, it expects credit cost to remain elevated in the near term. Thus, we estimate credit cost to remain elevated at 2.8%/1.8% for FY21E/FY22E.

Fee income highly granular; expected to pick up gradually: Retail fees form ~64% of the bank’s fees, signifying granularity in fee income. This is driven by cards/third-party distribution. But, fee income remains moderate and is likely to pick up gradually as economic activity revives.

Valuation and view: AXSB has delivered a resilient performance amid a challenging macro environment. It appears well-positioned to report strong earnings traction as fresh slippages subside, while improved underwritingand an increasing mix of retail help maintain strong control on credit cost. On the business front, retail disbursements have showed strong QoQ growth and surpassed pre-COVID levels. The bank has adopted conservative accounting policies and further strengthened the balance sheet by making additional provisions; the restructuring book remains low at ~0.42% of loans, and the BB & below pool has also declined. AXSB has guided for moderation in 4Q slippages.Nonetheless, credit cost would remain elevated as the bank remains cautious on the overall impact. We estimate AXSB to deliver RoA/RoE of 1.6%/15.4% in FY23. Maintain Buy

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